Any initiative to encourage saving behaviour should be applauded as long as the benefits and implications are understood and the expectations of what this delivers are realistic.
For many, especially younger people, spending necessities such as rent, food and travel will take precedence over saving for the longer term. Future needs can be perceived as an intangible concept.
This behaviour manifests itself by remaining in denial about consequences in the years ahead.
Government initiatives such as the new Lifetime ISA and pension auto-enrolment are trying to encourage a positive savings culture, and bring the concept for saving to a mass audience, via straightforward means.
Indeed, recent figures from The Pensions Regulator state that 100,000 employers have opted into auto-enrolment, meaning more than six million individuals are saving in this way, each with the expectation that they are providing for their retirement.
Although the financial consequences of opting out of this initiative could be catastrophic, equally as dangerous is the perception that being in this scheme, as it currently stands, will provide an acceptable standard of living in retirement. This can be woefully inaccurate.
Comparison to the current minimum and living wage rates highlights the savings needed to provide this minimum income year on year for the rest of an individual’s life, should this be the only form of income available. Future known or unknown income needs are likely to further increase the gross income figure required at retirement. :
Future known or unknown income needs are likely to further increase the gross income figure required at retirement:
(click on table to enlarge)
When you consider that retirement could very feasibly be another decade or two beyond the 20 years stated here, it’s clear that auto-enrolment, while an important and helpful initiative, is really just chapter one of the retirement story.
In the same way that auto-enrolment has become a topic of conversation for the vast majority of the population, so too must wider investment options.
The key is to consider the different tax advantages of the various saving options available. Wrappers can be subject to regular regulatory or technical change, which can impact their attractiveness over time, but this should not necessarily deter their use.
Maximising the benefits of various savings vehicles reduces the reliance on one or two solutions and can, with planning, provide a range of short, medium and longer term options, aligned to specific goals.
Anything that helps to build a culture that demystifies saving, and introduces it at an early stage in an individual’s working life, can make a huge difference. With this in mind, maybe now is the time for providers, advisers and experts in our industry to work together, agree strategies as part of a common goal and highlight this issue to individuals.
Yes, there are different competitive agendas, real ongoing affordability issues for some, regulatory constraints and other logistical challenges but the key point is that all parties would benefit from greater emphasis and understanding of the issues faced.
Without jointly addressing the issue and providing joined-up, consistent solutions to undersaving now, influencing future appropriate savings levels remains bleak for both individuals and the industry.
If your clients think they are saving enough, they need to think again!
Tony Parker is product manager at AXA Wealth
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